Report Pegs Volcker Costs at Up to $4.3 Billion

WASHINGTON — The Volcker rule is projected to cost major U.S. banks up to $4.3 billion, due largely to the lost value of investments in certain debt instruments, a federal bank regulator said Thursday.

A study released by the Office of the Comptroller of the Currency found that Volcker rule, which bars banks from trading with their own money, will cost between $413 million and $4.3 billion.

The 46 OCC-regulated banks most-impacted by the rule have combined assets of $8.7 trillion, the regulator said.
Regulators said there is high degree of uncertainty about the rule’s impact because it is not clear how much it will affect the market for investments in collateralized loan obligations and collateralized debt obligations.

Since banks would be forced to shed such assets under the rule, the market value of CDOs and CLOs would decline, resulting in a loss of up to $3.6 billion, the report says

CDOs are securities backed by a pool of mortgages or other loans, while CLOs bundle together corporate loans into bonds.

The OCC report found that banks’ costs for complying with the Volcker rule would have a smaller economic impact than losses to banks’ investments. The OCC projects compliance and reporting costs of up to $541 million.

Besides the 46 large banks impacted by the Volcker rule, up to seven smaller banks will be impacted, the agency said.
The Wall Street Journal reported last week that bankers have been trying to convince U.S. regulators to grant additional leeway for their investments

Bankers are pressing regulators to waive restrictions from holding CLOs as an investment, but their argument has yet to convince regulators, the Journal reported.

In January, regulators granted some initial relief from the Volcker rule by allowing banks to continue holding certain debt instruments backed by so-called trust preferred securities. The American Bankers Association had filed a lawsuit saying the rule could force 275 banks to incur a total of about $600 million in losses as a result of taking immediate write-downs on the securities.

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